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Up-and-Coming Overseas Small/Mid-Cap Funds

These funds may be young or small, but they have lots of potential.

William Samuel Rocco, 12/11/2012

The foreign small/mid-cap categories aren't very big--there are less than 90 funds spread across the three groups--but they do include several older funds that have attracted lots of assets. First Eagle Overseas SGOVX opened in 1993 and has more than $11.0 billion in assets, for example, while T. Rowe Price International Discovery PRIDX is 24 years old and has an asset base of roughly $2.8 billion. 

Meanwhile, in the world-stock category, only a few dozen funds focus on smaller-cap stocks. But some of these have been around for decades and have received considerable attention from investors. American Funds SMALLCAP SMCWX opened in 1990 and has more than $19 billion in assets, whereas Templeton Global Smaller Companies TEMGX is more than 30 years old and has an asset base of nearly $900 million.

However, the vast majority of the international-stock funds that concentrate on smaller-cap stocks aren't nearly as old or as big as those funds. And some of the overseas small/mid-cap offerings are quite young or small: Roughly 20% of them have opened since late 2010 and approximately 40% of them have less than $200 million in assets. Of course, whether they focus on foreign smaller caps or other types of securities, new funds often start out with little to recommend them, and older offerings can receive limited attention from investors over time for good reasons.

But some young or tiny offerings have a lot going for them. That's certainly the case with Allianz NJF International Small Cap Value AJVAX, Grandeur Peaks International Opportunities GPIOX, Grandeur Peaks Global Opportunities GPGOX, and Harding Loevner International Small Companies HLMSX.

Allianz NFJ International Small Cap Value
This foreign small/mid-cap value fund is just six months old and has a mere $5 million in assets, but its pedigree gives it a bright future. It is subadvised by a first-rate value shop, NFJ Investment Group. The NFJ team that manages the portfolio--which includes skipper Baxter Hines and firm co-founder Ben Fischer plus Paul Magnuson and Morley Campbell--all have good resumes for the task at hand. 

Further, the team employs a low-P/E and dividend-oriented strategy that is inherently sound and has earned strong long-term results at both Silver-rated Allianz NFJ International Value AFJAX (which is run by a team that is led by Fischer and includes Hines and Magnuson) and Silver-rated Allianz NFJ Small Cap Value PCVAX (which is run by a team that is led by Fischer and includes Magnuson and Campbell). And despite its youth and tiny size, this fund is starting with a below-average expense ratio that will serve it well over time. (Please note that this fund is slated to make a very small capital-gains distribution later this week.)   

Grandeur Peaks' International Opportunities and Global Opportunities
These 14-month-old siblings have a lot in their favor. For starters, they have been impressive performers so far. Grandeur Peaks International Opportunities, a foreign small/mid-growth fund with $118 million in assets, has earned a 23.5% aggregate gain from its October 2011 launch through Dec. 6, 2012, versus 16.2% for the average foreign small/mid-growth offering. And Grandeur Peaks Global Opportunities, a smaller-cap world-stock fund with $198 million in assets, has delivered a 22.0% aggregate gain from its October 2011 launch through Dec. 6, 2012, while the typical smaller-cap world-stock offering has produced a 13.9% aggregate return over the period (and the average world-stock fund has earned a 14.4% aggregate gain). 

What's more, there's a strong management team and a proven strategy behind these strong early results. Robert Gardiner is one of the most seasoned and skilled small-cap investors around. Indeed, prior to founding Grandeur Peaks, he spent 25 years at Wasatch, where he had a long and excellent run as the lead manager of a micro-cap fund as well as shorter but successful tenures managing other small-cap offerings, including a global one. Blake Walker is another Wasatch alum who has spent a dozen years in the small-cap-investing field, including several good years managing international and global small-cap offerings. And as would be expected, Gardiner and Walker are employing the same high-quality growth strategy on these two funds that they used successfully at Wasatch. (Please note that both funds are slated to make very small distributions later this month.)  

William Samuel Rocco is a senior fund analyst with Morningstar. He would like to hear from you, but he cannot provide individual-portfolio or financial-planning advice.

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